Choosing Among the Self-Employed and Small-Business Plans
The decision is driven by two variables and almost nothing else: whether you have employees, and how much profit you need to shelter.
| Situation | Plan | Why |
| No employees, profit under roughly $50,000 | SEP IRA or Solo 401(k) | At low profit the Solo 401(k) still wins, because the elective deferral does not depend on the 20% employer computation — but a SEP is defensible if you value the near-zero paperwork. |
| No employees, profit $50,000–$400,000 | Solo 401(k), add the after-tax sleeve if the document allows | The deferral plus 20% employer contribution reaches the $72,000 ceiling at roughly $190,000 of profit, far below the $288,000 a SEP would need. |
| No employees, profit above $400,000 and owner 45+ | Solo 401(k) + cash balance plan | The only structure that clears $72,000. Mind the 6% profit-sharing constraint under §404(a)(7) (section “Defined Benefit and Cash Balance Plans”). |
| Employees, want simplicity and low cost | SIMPLE IRA | No testing, no Form 5500, but the deferral caps at $17,000 and the mandatory match is immediate — and mind the two-year trap below. |
| Employees, owner wants to max out | Safe harbor 401(k), usually 3% non-elective | Buys the ADP/ACP and top-heavy exemption so the owner can defer the full $24,500 plus profit sharing. |
| Employees materially younger than the owners | Safe harbor 401(k) + new comparability profit sharing | Cross-testing on projected benefits legitimately skews the allocation toward older owners. |
| High, stable profit, employees, owner 45+ | Safe harbor 401(k) + cash balance | Maximum shelter, maximum cost and commitment. Requires a competent TPA. |
Two crossover figures are worth memorizing because they settle most arguments. A SEP reaches the $72,000 ceiling only at $288,000 of compensation for a corporate owner, and higher for an unincorporated one on the 20% computation; a Solo 401(k) reaches it at roughly $190,000, because the $24,500 elective deferral stacks on top of the same employer percentage. And the cash balance plan is the only door above $72,000 — there is no fourth option, no matter what a promoter tells you.
The SIMPLE two-year trap. One rule specific to SIMPLE IRAs deserves a flag, because it converts an ordinary consolidation into a penalty. For the first two years measured from the date of your first contribution, a distribution before age 59½ carries a 25% additional tax rather than the usual 10%, and the account may be rolled only into another SIMPLE IRA — a rollover to a traditional IRA, a 401(k), or a Roth inside that window is treated as a taxable distribution and draws the same 25%. If you leave an employer with a SIMPLE plan, check the date on the first contribution before you touch the account. After two years it behaves like any other IRA.